Thursday, August 2, 2012

AirAsia ... Aug12

TA securities Research ...

Acquisition of PT Metro Batavia
AirAsia Bhd entered into a conditional share sale agreement together with its Indonesian partner, PT Fersindo Nusaperkasa (Fersindo), to acquire 100% interest in PT Metro Batavia for a total cash consideration of USD80mn (RM253mn). AirAsia will hold a 49% stake in Metro Batavia and the remaining
51% stake will be held by Fersindo, as aviation laws in Indonesia requiring foreign shareholdings to not exceed 50% interest in the entity. Note that Fersindo is also the 51% majority shareholder of Indonesia AirAsia (IAA).

Background of PT Metro Batavia and Batavia Air Metro Batavia operates a Low Cost Carrier (LCC) – Batavia Air, and Aero Flyer Institute, an aviation training school. Founded in 2002, Batavia Air operates a
fleet of 37 aircraft, serving 41 domestic routes and 7 international destinations. It also owns a certified flight school, simulator training centre and aircraft maintenance facilities to support its operations.

Indonesia AirAsia’s market share will get a boost
This acquisition comes on the heel of AirAsia’s decision to make Jakarta as its regional hub. This acquisition is also in line with the group’s strategy to increase its presence in the fast growing Indonesian domestic market. We are positive on the deal as it will immediately increase IAA’s domestic capacity share from 3% to 10%. This will in turns bring in a sizeable feeder network to the other sister airlines of AirAsia. The combined entities will become the third largest LCC in Indonesia by passenger carried, after Lion Air and Garuda’s Citilink. Post acquisition, the combined entities will serve 42 domestic and 12 international destinations.

Synergistic acquisition
We gather that Batavia Air has struggled to survive in the tough operating environment and posted dismal earnings for FY11. However, we believe AirAsia could turnaround Batavia Air and enhance its operational efficiencies through 1) the integration of ticketing systems and operations; 2) joint procurement for fuel and 3) joint maintenance facilities.


Benefit from Batavia Air’ domestic distribution channel
Currently, Indonesian market still relies on traditional distribution channel and  travel agents in handling the purchase of air ticket due to lower internet penetration level. We believe IAA will be benefiting from Batavia Air’s domestic distribution channel which comprises 43 outlets with about 4666 agents. According to the management, the number of distribution channels in Indonesia will increase ten-fold to over 5000 authorised agents and than 70 sales outlets following the acquisition. We view this positively as the enlarged agency footprint will be able to reach more customers while complementing AirAsia’s Internet based sales.

Future Plans
Going forward, we expect to see AirAsia group to aggressively transform Batavia Air as another sister airline of the AirAsia Group. It also plans to restructure the Batavia Air’s Flying School and Simulator Training Units to fulfill the growing demand of aviation crew training program and potentially monetizing the business with its CAE Inc.

Impact
While we are positive on the acquisition, the turnaround of Batavia Air will take some time. We expect earnings contribution from the acquisition will be at the later stage as both airlines have to work on the integration of routes and operations. No change to our FY12-14 earnings estimates at this juncture. The
acquisition is targeted for completion by 2Q2013, and is subject to regulatory approvals. Note that AirAsia Indonesia’s IPO launch which was initially planned for the fourth quarter of this year, will be postponed until the completion of the acquisition of Batavia.

Valuation
We maintain our BUY recommendation for AirAsia’s with an unchanged target price of RM4.80 based on target CY13 PER of 13x. We peg a 30% premium compared to the regional peer’s average CY13 PER of 10x. We believe that AirAsia deserves to trade a premium to the USA and European LCCs given that
AirAsia is operating in a fast emerging aviation market.

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